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Your Answer

Question ID : 42270



Posted by NAVEEN K S on May 01, 2022

Filed Under Companies Act, 2013

Answer ID : 81481

Accounting treatment Share issue expenditure is ideally written-off to profit and loss account in the year it is incurred, unless there is a reason to expect benefit to be derived in the years to come. If the management is in a position to determine the benefit derived out of such expenditure, it can be carried forward to be written-off over the period in which such a benefit is expected be derived. In case a company raises equity to redeem existing preference share capital, the benefit cannot be expected to be determinable over a reasonable period of time. In such a situation, share issue expenses are to be expensed out through the profit and loss account in the year in which the expenditure is incurred. But, if the issue is made to finance a project, the benefit out of the share issue expenditure is deferred to a reasonable period when the project is commissioned. Such a situation warrants the expenditure be carried in the balance sheet till it is written off. Disclosure in financial statements As this item is not preliminary expenditure within the meaning of the Companies Act, it would be improper to disclose it as such. In case it is not expensed out through the profit and loss account, the expenditure is to be carried in the balance sheet. A guidance note of the ICAI requires such expenditure to be disclosed as a separate head under “Miscellaneous expenditure to the extent not written off”. Tax treatment It was held that share issue expenses are capital for income-tax purposes. As a result, it is not deductible from profits. The only exception can be inferred from a reading of Sec.35D of the Income Tax Act, dealing with amortising of preliminary expenses. If the issue is made to finance a project, share issue expenditure constitutes preliminary expenditure for the purposes of this section. Therefore, such expenditure, subject to the limits specified under this section, can be amortised over a period of five years commencing from the year in which the project starts generating income.

Posted by ASHISH TULSHYAN on May 05, 2022